Xerox & RR Donnelley Merger Talks Boost Shares of Both

According to a Bloomberg article, information technology services provider Xerox Corporation XRX is reportedly in early level talks to acquire financial printing firm R.R. Donnelley & Sons Company RRD.

Although the spokespersons of both the companies refused to comment on the grapevine, people familiar with the matter opine that the transaction is likely to be closed by the end of the year before the proposed Xerox split comes into effect. The news lifted the share prices of Xerox and R. R. Donnelley by 2.3% and 6.7% to $9.72 and $19.68, respectively in the after-market trading.

The Acquiree

Since its inception in 1864, R. R. Donnelley has evolved as a leading provider of multi-channel communication services across the globe with operations in North America, Latin America, Asia, Europe and Australia. The company has reorganized its portfolio to become more service-oriented and focused on value-added products with emphasis on data analytics, content optimization and multi-channel marketing.

DONNELLEY RRD Price

DONNELLEY RRD Price | DONNELLEY RRD Quote

In order to tap the unique industry dynamics and capitalize on the opportunities of its individual businesses, the company had planned to split into three standalone industry leading public firms. These included a Customized Multi-Channel Communications Management firm focused on branded communication strategies, a Financial Communications entity that would provide data management and analytics solutions to the corporate filing and global financial community, and Publishing & Retail-Centric Print Services firm that would offer periodicals and catalogs.

However, if the proposed transaction with Xerox materializes in the near future, the plan for the tax-free split would be nullified and R. R. Donnelley would form an integral part of the former.

The Acquirer

Xerox has been grappling with slow demand in its printing business for years, while its attempts to leverage the business process outsourcing market also failed to lend growth momentum. The company also endured a number of slip-ups in its Medicare and Medicare information services for several government agencies across the U.S.

XEROX CORP Price

XEROX CORP Price | XEROX CORP Quote

In 2015, the company conducted a review of structural options for its portfolio and capital allocation. On the basis of this review, the company decided to split into two independent, publicly traded entities in the first quarter of 2016. The process is expected to be completed by the end of 2016. The separation will see Xerox segregating its hardware operations and its services business. While one would comprise Document Technology and Document Outsourcing businesses, the other its Business Process Outsourcing BPO business. Both these entities would likely feature among the Fortune 500 companies and will be leaders in their respective markets.

The Trade-Off

Both Xerox and R. R. Donnelley had been scouting for survival strategies to beat the market blues. Amid such a scenario, the proposed transaction could offer a lifeline to both the beleaguered companies. Xerox will likely merge some of the businesses of R. R. Donnelley with its copier, printer and related-services business and the rest with its smaller business process outsourcing services. Although the deal is currently in a nascent stage and might not even materialize in its entirety, the uptick in share prices appear convincing and represent a positive connotation from the investor community.

Xerox currently has a Zacks Rank #3 (Hold). A couple of better-ranked stocks in the industry include Core-Mark Holding Company, Inc. CORE and PFSweb Inc. PFSW, both carrying a Zacks Rank #2 (Buy).

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